5 Common Costs To Be Aware Of When You Are Investing

Cost is an area that people always want to reduce. Whether it’s spending less to buy a car because COE prices have fallen, or buying a gadget at a lower cost thanks to a promo code, paying less for the same item is always better than having to pay more.

Hence, there is a sense of irony that when it comes to investments, investors are not as cost-conscious about the expenditure they incur for making their investments. After all, the only reason to invest is to be able to generate returns and a higher cost translates into getting lower returns.

Here are five common cost areas that you should be looking out for in order to maximise your investment returns.

#1 Sales Charges

Sales charges are the most common type of cost that you will find. Almost all investments that you make will incur some form of sales charge, some more than others.

For example, mutual funds (better known in Singapore as unit trusts) could charge up to 5% as the initital sales charge. That means if you invest $10,000, you may only find $9,500 being used for investments, with the remaining $500 used to renumerate whoever sold you the investment.

The brokerage fee that you pay for buying and selling stocks is also a type of sales charge. If you buy a stock for $3,000 and pay $30 as commission, your sales charge is essentially 1%. This cost is usually added on top of the amount you invest, so you end up paying $3,030 instead of $3,000.

#2 Spread

Spread is an important cost area that you should be aware of, especially if you buy and sell your investments regularly.

What it means is that when you buy into an investment, you tend to pay more compared to what you would receive if you sell the investment at the same value. It’s just like changing currency at the money changer.

For example, you may be charged $1,000 to buy a unit in a fund while sales of the same unit may net you only $950. The $50 difference is the spread you are paying. With all things being equal, the higher the spread, the more money you lose on each transaction.

#3 Fund Management Fee

Fund management fee is a cost area that you usually incur when you invest through in a fund.

The logic here is simple. Fund managers need to be paid for their work to identify and monitor investments that they have made on behalf of the fund. They will also be paid regardless of whether or not they perform well.

On average, you can expect fund management fees to be about 1 to 1.5% per annum. That means for every $10,000 worth of investments that you hold in a fund, you should expect to pay between $100 to $150 each year.

One area that many people commonly forget is that even passively managed funds such as ETFs also incur a fund management fee. Thus, as much as these investments are marketed as low-cost alternatives, they are not free from management fees.

#4 Admin/Custodian Charges

If you invest overseas through a local broker, or via an investment-linked insurance policy (ILP), keep a close eye on any admin and/or custodian fee that you may incur.

For example, there are investment accounts that may charge you a custodian or account maintenance fee each year. This can be a fixed amount, or a percentage of your portfolio. In addition to that, some investments may even charge you a monthly administrative charge of up to $10.

#5 Capital Gain/Dividend Tax

This is more commonly associated with investment made overseas.

If you invest in countries such as the United States (U.S.), it’s best to understand their tax policies before you get started. For example, dividends paid out by U.S. companies are subject to a 30% tax. There are also capital gain taxes that you should consider as well.

Remember To Include These Costs When Calculating Your Investment Returns

Some retail investors look at gross returns without considering their actual returns. However, not considering cost is a poor way to evaluate your investments. You may think you are getting a high return of 7% from your investments, only to realise that after taking cost into account, your return is only 5%, which is no better than if you have left it in your CPF Special Account.

At times, some cost areas are not even made known to investors.

So make it a point to not only understand the type of investments you are making, and the risks associated with these investments, but also the costs that you are incurring.